NSE tightens margin funding rules, excludes 1010 stocks including Paytm

The NSE has drastically reduced the list of stocks eligible for collateral in margin funding, removing 1,010 stocks, including Adani Power, Yes Bank, and Paytm, effective August 1

In a recent circular, the National Stock Exchange (NSE) has significantly narrowed the list of stocks eligible for collateral in margin funding, according to a report by Moneycontrol.

Of the 1,730 stocks previously eligible, the NSE has removed 1,010, including notable companies like Adani Power, Yes Bank, Suzlon, Bharat Dynamics, and Paytm. These changes will take effect on August 1, 2024, according to the report.

Per the new NSE guidelines, starting August 1, only securities traded at least 99 per cent of the days in the last six months and with an impact cost of up to 0.1 per cent for a Rs 1 lakh order will be accepted as collateral.

Impact on traders and investors

Financial institutions, such as banks and non-banking financial companies (NBFCs), require collateral to secure loans. In the event of a default, the lender can sell the collateral to recover the loaned amount. Common collateral includes assets like homes, cars, gold, and company stocks.

In the context of margin trading, brokers offer short-term loans against the shares held by traders. However, not all company shares qualify as acceptable collateral.

Regulatory bodies set specific criteria to determine which shares can be used as collateral. This recent regulatory tightening means fewer shares will qualify in the future.

What are Margin Trading Facility?

Margin Trading Facility (MTF) is akin to the ‘buy now, pay later’ model. It allows investors to purchase shares with only a portion of the total trade value upfront. The broker covers the rest of the investment, charging interest on the borrowed amount. For instance, to buy 1,000 shares at Rs 100 each, an investor would need Rs 1 lakh. With MTF, they might only need to pay 30 per cent, while the broker provides the remaining 70 per cent at an interest rate.

Which stocks are excluded from collateral eligibility?

Under the revised circular, stocks like Adani Power, Yes Bank, Suzlon, HUDCO, Bharat Dynamics, Bharti Hexacom, IRB Infra, NBCC, Paytm, Inox Wind, and JBM Auto are no longer eligible for collateral in margin funding. The total number of excluded stocks is 1,010.

What will be the market implication?

Margin trading is advantageous for both traders and brokers. Traders can leverage larger capital to make substantial bets, while brokers earn interest from the loans provided.

The new NSE order aims to reduce risk associated with margin funding. Stocks that remain on the eligible list are highly liquid and considered robust, according to a CNBC-TV18 report.